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Facebook case: the merger with Whatsapp

4. Competition authorities and case studies

4.8 Facebook case: the merger with Whatsapp

The problem is to find a way to tax firms when even if they operate in a country, their main activities are declared to be outside of the country. In fact, in the actual tax system, Specific taxes for online platforms (“Google taxes”) were proposed in Italy, France and Great Britain: in the firsts it didn’t go further, in UK the diverted profit tax was implemented with this purpose, but it wasn’t successful. The problems are the following:

• Online platforms don’t need a constant physical presence in the country (“permanent establishment”) to sell good and services there: this lead to the problem of where to tax.

• Online platforms have different business models derived from exploitation of data and intangible assets and it is difficult to give value to their assets: this lead to the problem of what to tax.

The permanent establishment rules should be replaced, for the digital sector, with other indicators for significant economic presence, to make the firm taxable in a country and solve the first problem.

The second problem requires alternative systems to allocate profits in countries: the transfer pricing rules can’t be used with digital platforms because the result would be tax avoidance and inefficiency (as happened with the two cases studied). [51]

These challenges are not easy to overcome, and the Commission knows that a common decision that includes all European countries should be taken, in order to find a solution and a tax system able to allocate and capture the value created by digital firms. This will take time and, for the moment, some short-term solutions are being implemented. We will discuss the short-time solutions recently implemented by EU Commission and which could be some long-time solutions in the next chapter.

Consumer communication services are multimedia solutions that allows to communicate with other people. These services are offered by a single app (WhatsApp, Skype) or by a feature that is integrated in a bigger platform like a social network (Facebook Messenger) and allows real-time conversations between two users or a group of users, with the availability of different options like messaging, video chat, voice call, sharing of multimedia and location, etc., even if not all these functionality are available in all consumer communication apps.

Social network services is the core service offered by Facebook, it is a recent phenomenon still in its early stages of evolution; these services enable users to connect, interact in different ways and express themselves in an online platform or in a mobile app. The essential functionalities of a social network service include creation of a profile and a list of contact, it can include also a messaging feature, the possibility of sharing information and commenting posts. There is an overlap between the market for consumer communication services and the market for social network services since they both enable users to share content; anyway, social network services offer a richer experience and reach a wider audience than consumer communication apps, that are more personal.

Online advertising services are provided by Facebook social network platform: Facebook collect users’ data in order to target them and offer personalized ads on behalf of advertisers. On the other hand, WhatsApp doesn’t sell advertisement nor collect data about users since messages are not stored in WhatsApp servers.

4.8.2 Commission investigation

The Commission investigated the possible consequences of the transaction on competition in the three relevant markets. Facebook and WhatsApp are both active in the market for consumer communication services, while only Facebook is active in the other two relevant markets.

Even if consumer communication apps are characterized by strong network effects, the Commission considered that there is also high possibility to multi-home, switching costs and barriers to entry in this market are low so the network effects are mitigated. The market of consumer communication apps is a recent and fast-growing sector, still dynamic; for this reason the Commission think that high market shares don’t imply necessarily market power. For these reason, the transaction doesn’t pose competition problems in this market. Moreover, Facebook and WhatsApp are not considered close competitors in this market by the Commission since the two are utilized as complementary products by the consumers, they have a different privacy policy and they offer a different experience to users.

Regarding the market of social network services, the Commission concluded that there is no competition between the two companies in this market and the potential integration of Whatsapp and Facebook is not in the company’s plans and would not be a threat to competition anyway.

In the market of online advertising the Commission analyzed two possible outcomes that could harm competition: the introduction of advertising on WhatsApp by Facebook and the use of WhatsApp’s data to improve the targeting of Facebook’s ads. Facebook declared that it wasn’t its intention to apply one of the two scenarios and the Commission concludes that both scenarios would not raise competition issues since a great number of alternatives would keep on being available for users.

4.8.3 Final decision and 2017 fine

The Commission decided, on October 3, 2014, not to oppose to the transaction and declared it compatible with the vigent competition rules.

In August 2016, WhatsApp updated its privacy policy and term of service, introducing, along with some new features like WhatsApp Web, the possibility to match Facebook account with the WhatsApp one through the phone number. The Commission opened an investigation in December 2016, addressing to the company the allegation of providing misleading informations during the 2014 investigation, since Facebook always declared it had no intention at all of connecting users’

profile of the two platforms. This doesn’t change the 2014 decision since the Commission considered the possibility that this could happen and concluded that it would not have been a treat for competition, but the Commission decided on May 18, 2017 that Facebook is fined for €110 million for giving misleading information. [54]

4.8.4 Case analysis

The case describes the biggest merger of the last years, which approval was highly debated and criticized. The decision definitely taken by the Commission was to approve the merger, substantially because the two companies were not considered direct competitors but rather complementaries for users and that the market power of the merging company didn’t raise competition concerns.

Ocello [54] analyzes the decision in order to understand which lessons should be learnt from that.

At the time of the decision, Facebook had 1.3 billion users worldwide, with 250-350 million of them users also in Facebook messenger app, while WhatsApp had 500 million users. The transaction was highly debated because of the important parties and because Facebook was about to pay 19 billion dollars fot a company with a turnover of only around ten million euros. Because of this, the merger didn’t meet the turnover thresolds required by the EU Merger Regulation. The Commission find it necessary to investigate the transaction anyway, because of the size of the two companies.

The two companies were of course complementary to users, as the Commission declared. In fact, WhatsApp offers little features about profile personalization (just a photo and a static status; most recently, after the merger, you can also share histories) and a private communication service that you can access only knowing the phone number of the person you want to communicate with, while Facebook has the wider purpose to allow users to connect with everyone that has a profile, just searching them by their name and adding them to the friends’ list, and offer to users wide opportunities to personalize its own profile, creating photo albums, sharing posts, videos and other media with all the network. It is also true that WhatsApp’s size, if measured by its turnovers, wasn’t as high as to raise concerns about the market power deriving from the merger.

However, the fact that they offered different services to users doesn’t mean that they were not in competition at all between each other: when people communicate through WhatsApp, they are not spending time on Facebook or chatting via Facebook Messenger, so in some ways WhatsApp was stealing audience from Facebook. Even if WhatsApp had little turnovers, both the companies could

gives a great market power to the merging company, a power measured not by the companies’

turnover but by their ability to exponentially grow thanks to network effects and develop economies of scale, and mostly by the amount of data the merger unit owns, that gives great value to it.

Moreover, online platform markets are dynamic and even if in the present situation, when the Commission made the decision, Facebook and WhatsApp were not direct competitors, in the future they could have been. WhatsApp could have grown, diversified and expanded in new market, becoming a direct competitor of tech giant platforms: Google and Facebook are direct competitors in the online advertising market even if at the beginning they were respectively only a search engine and a social network. By approving the merger, the Commission could have allowed Facebook to eliminate a potential future threat when it was still small.

Another concern that can be identified has something to do with privacy and data protection.

Facebook is the biggest social network of the world, with billion of users, and the company knows so many things about its users thanks to the data collected with them, that it would be able to rebuild its personalities, passions, potential behaviours better than these users’ friends. In addition to this, the Commission allowed to the company the acquisition of WhatsApp, a messaging system that billions of people use every day and that has practically replaced the SMS system. This is not a competition problem, as the Commission underlined when taking its decision: concern about data and privacy were raised during the investigation but they didn’t fall in the scope of EU competition law rules, rather in the one of EU data protection rules. Anyway, the Commission considered two possible outcomes of Facebook using personal data from WhatsApp that could harm competition (introduction of ads on WhatsApp and using WhatsApp data to improve targeting of Facebook ads), but judged them unlikely to materialise. However, with the introduction of the new GDPR (see section 4.2.3) we hope that the introduction of data portability will mitigate the competition problems caused by data collection.